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BP: Now Come the Fines

The company could face as much as $17.6 billion in civil penalties for Gulf spill, though the actual amount is likely to be much lower

After months of technical setbacks, embattled BP (BP) in early August was finally on the verge of capping its runaway Macondo well, source of the largest oil spill in U.S. history. Even as the oil giant's focus shifts toward the massive cleanup of the Gulf of Mexico, it now must contend with expensive civil fines it faces stemming from the disaster.

BP could face as much as $17.6 billion in civil penalties, based on a federal panel of experts' estimate on Aug. 2 that about 4.1 million barrels of oil leaked from its well into the Gulf. Although environmental lawyers say BP is likely to negotiate a lower penalty, the fines could still crimp the company's ability to pay for cleanup costs, force it to sell more assets, and cut into future investment plans of incoming Chief Executive Officer Robert Dudley.

The Clean Water Act makes BP, as owner of the oil, liable for fines of $1,100 per barrel spilled even if it did nothing wrong, says Wayne State University law professor Noah Hall in Detroit. The penalty jumps to $4,300 per barrel if BP was grossly negligent. Hall says gross negligence in a civil case would include making "conscious decisions" that increased the likelihood of an incident while engaged in a risky business, such as deepwater drilling.

BP Chairman Carl-Henric Svanberg told Bloomberg Television on July 27 that the company doesn't believe it will be found grossly negligent or determined to be the sole responsible party for the spill.

Hall says the fine ultimately imposed is not likely to be "anything like that" $17.6 billion maximum because BP and the government have a mutual interest in a lower number. "Both the federal government and any judge will take into account that BP has spent or will spend billions to remediate and clean up the spill," he says. "At some point, BP says: 'If you hit us with the maximum in penalties, plus $20 billion in cleanup and $20 billion in claims, you'll push us into bankruptcy.' The federal government doesn't want to push BP into insolvency."

The civil fines under U.S. environmental laws are separate from costs BP is facing to clean up the spill and compensate victims of the disaster. Last month, BP took a $32.2 billion charge for the cost of cleanup and compensation, and its estimate of possible penalties. The company has already paid more than $4 billion in spill-related expenses.

BP has established a $20 billion escrow fund to pay remaining claims by individuals and businesses harmed by the spill. For those who don't take an escrow payout, claims will be handled in more than 300 proposed class actions and shareholder suits tied to the spill. The company may also be liable for civil penalties for violations of other environmental laws, including the Endangered Species Act. That law imposes fines of as much as $25,000 per animal killed by the oil, a number not yet estimated.

The U.S. Justice Dept. is investigating whether criminal or civil laws were broken before the explosion, Attorney General Eric Holder said in June. The government could pursue fines under civil and criminal laws, as it did when it claimed BP released more than 5,000 barrels in two spills from its Prudhoe Bay (Alaska) field in 2006. Gregory Evans, a Los Angeles attorney who represents defendants in environmental litigation, says BP likely can mitigate the fines from the Deepwater Horizon incident by cooperating with investigators probing the causes of the blast and size of the spill.

Evans says that the Macondo spill estimate from the government's scientific panel is likely only "a starting point" for negotiations between BP and the government. "It does not preclude BP or any of the other potentially responsible parties from challenging it...with reliable, independent studies," he says. Indeed, BP spokesman Daren Beaudo cautioned after the panel's finding that "there will always be uncertainty in any estimate as the flow cannot be measured directly."

The big worry for BP is avoiding a gross negligence finding by a court. Besides triggering the $4,300 per-barrel maximum fine, such a ruling would also bar BP from seeking contributions from its well partners, Anadarko Petroleum (APC) and a unit of Japan's Mitsui Oil Exploration. Both have already shown reluctance to pay portions of the mounting cleanup costs. "Gross negligence protects the silent partners," Hall says. Some lawyers believe BP's need to keep its partners on the hook to share in any potential fines increases the government's leverage in negotiations with the company. "You don't have to be that bad to meet the standard of gross negligence" under civil law, Hall says. It's only necessary to show "that they engaged in risky business and made some bad decisions."

Houston attorney David H. Berg, who often sues polluters on behalf of municipalities, says "there's zero chance" the U.S. will impose the maximum civil fine on BP. Berg figures BP should expect to pay fines of $3 billion to $5 billion because it has a record of environmental compliance problems, including previous settlements in the Alaska incident and another in Texas. Hall, however, predicts the civil fines on BP would be lower, only about $1 billion to $2 billion. "That would [still] allow Obama and the Interior Dept. to say they forced the largest fine ever," he says.

The bottom line: BP, which faces a $17.6 billion maximum civil fine for the Gulf spill, is likely to negotiate a far lower penalty.